Moody's Threatens U.S. Credit Rating Cut

Moody’s rating agency says it may cut the U.S. government’s credit rating. A new report says the U.S.’s triple-A could depend on Congressional debt negotiations in 2013.

The report says the triple-A will stay if Congress can enact legislation to bring down the country’s debt-to-GDP ratio — meaning national debt as a percentage of total output. If not, expect a rating cut before 2014, likely to a AA1.

The U.S.’ credit rating has already been cut once before. S&P cut the rating to AA+ last August when Congress took till the eleventh hour to avoid a government shutdown.

A writer for Forbes says since then agencies like Moody’s have used the threat of a ratings cut to push for “fiscal discipline and action from Congress.”

Business media reacted differently to the news. For instance, a CNBC panel points out last year’s rating cut didn’t lead to the gloom and doom analysts predicted.

“The yield on the 10-year promptly plunged.”
“Right. … And equities, too.”
“I mean, literally, this was one of those moments where the vast majority of people had it wrong.”

But an analyst for Bloomberg says the threat of higher interest rates on government debt as a result of the cuts is too serious to ignore.

“How many times do you see bonds rally the way they did when they got cut by S&P? Very unlikely to happen if Moody’s takes action again. So they really need to pay attention what that means for interest rates.”

A few sites were largely critical of Moody’s. A writer for Barron’s asks, if the negotiations aren’t until next year, why give the warning now...

“...the morning of the 11th anniversary of the Sept. 11th attacks, in the midst of a heated presidential campaign ... and during a week in which the Fed is widely expected to announce further quantitative easing measures...”

A Business Insider writer was even more harsh, criticizing not just the timing, but also the idea of a “debt deal.” The site notes efforts to cut spending always seem to lead to more debt.

“So not only does this warning from Moody's come at a terrible time, it's asking Congress to do something impossible, which is reduce debt-to-GDP by focusing on debt-to-GDP rather than focusing on growth. Our advice to everyone is to ignore Moody's.”

But a CNN radio reporter noted on Twitter, the report hits just as Congress gets back to work, and is likely meant as a warning.

Current government figures put the debt-to-GDP ratio at 101.6 percent — just over $16 trillion.